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By the end of this section, you will be able to:

  • Evaluate the appropriate competition policy for a natural monopoly
  • Interpret a graph of regulatory choices
  • Contrast cost-plus and price cap regulation

Most true monopolies today in the U.S. are regulated, natural monopolies. A natural monopoly poses a difficult challenge for competition policy, because the structure of costs and demand seems to make competition unlikely or costly. A natural monopoly    arises when average costs are declining over the range of production that satisfies market demand. This typically happens when fixed costs are large relative to variable costs. As a result, one firm is able to supply the total quantity demanded in the market at lower cost than two or more firms—so splitting up the natural monopoly would raise the average cost of production and force customers to pay more.

Public utilities, the companies that have traditionally provided water and electrical service across much of the United States, are leading examples of natural monopoly. It would make little sense to argue that a local water company should be broken up into several competing companies, each with its own separate set of pipes and water supplies. Installing four or five identical sets of pipes under a city, one for each water company, so that each household could choose its own water provider, would be terribly costly. The same argument applies to the idea of having many competing companies for delivering electricity to homes, each with its own set of wires. Before the advent of wireless phones, the argument also applied to the idea of many different phone companies, each with its own set of phone wires running through the neighborhood.

The choices in regulating a natural monopoly

So what then is the appropriate competition policy for a natural monopoly? [link] illustrates the case of natural monopoly, with a market demand curve that cuts through the downward-sloping portion of the average cost curve . Points A, B, C, and F illustrate four of the main choices for regulation. [link] outlines the regulatory choices for dealing with a natural monopoly.

Regulatory choices in dealing with natural monopoly

The graph represents a natural monopoly. The graph shows four points that represent the main choices for regulation, a downward-sloping average cost curve, and a downward-sloping market demand curve.
A natural monopoly will maximize profits by producing at the quantity where marginal revenue (MR) equals marginal costs (MC) and by then looking to the market demand curve to see what price to charge for this quantity. This monopoly will produce at point A, with a quantity of 4 and a price of 9.3. If antitrust regulators split this company exactly in half, then each half would produce at point B, with average costs of 9.75 and output of 2. The regulators might require the firm to produce where marginal cost crosses the market demand curve at point C. However, if the firm is required to produce at a quantity of 8 and sell at a price of 3.5, the firm will suffer from losses. The most likely choice is point F, where the firm is required to produce a quantity of 6 and charge a price of 6.5.
(*Total Revenue is given by multiplying price and quantity. However, some of the price values in this table have been rounded for ease of presentation.)
Regulatory choices in dealing with natural monopoly
Quantity Price Total Revenue * Marginal Revenue Total Cost Marginal Cost Average Cost
1 14.7 14.7 - 11.0 - 11.00
2 12.4 24.7 10.0 19.5 8.5 9.75
3 10.6 31.7 7.0 25.5 6.0 8.50
4 9.3 37.2 5.5 31.0 5.5 7.75
5 8.0 40.0 2.8 35.0 4.0 7.00
6 6.5 39.0 –1.0 39.0 4.0 6.50
7 5.0 35.0 –4.0 42.0 3.0 6.00
8 3.5 28.0 –7.0 45.5 3.5 5.70
9 2.0 18.0 –10.0 49.5 4.0 5.5

Questions & Answers

what is the real definition of economics
jegede Reply
Economics is the study of the use and allocation of (scarce) resources
demsurf
Jegede, what is the "non" real definition of economics then?
Ernest
incidence of production there is a choice do you agree? justify
Oduro Reply
What is incidence of production? do u mean incidence of tax?
Aryeetey
I want to know about Richard lipsey and robin as the economist and their definition proposed by them
Musa Reply
what are the causes of scarcity And what are the goal scarcity
Musa
scarcity only exist because human wants are unlimited...if human just know how to be contented then scarcity will not exist
Ylaine
what is ment by possibility curve
Ruzaiq
define accounting?teatly
Ahmed Reply
Is the recording, classifying, interpreting record of all transaction
Yuusuf
is still the act of measuring, interpreting and communicating of financial issues
Yuusuf
measuring business or individual finance
Zeyi
Accounting is the process of collecting,recording,classifying,summarizing and interpreting/presenting financial data to the stakeholders for their economic decision making
asri
hi
Otilina
hi
AVIAH
wat is PPC
ALLAJI
what are the different between need and wants
Musa Reply
the major difference is necessity
Yuusuf
explain any four tool of monetary policy to solve the problem of inflation.
Alicesha Reply
bank rate,open market operation,legal reserve requirement
Johnson
what's marginal utility?
Abena Reply
the additional utility you get if you can consume one more unit of the good x
Luka
Thanks... then what's the law of diminishing marginal utility ?
Abena
The utility decreases with every unit you consume (most of the time). The first unit of consumption will therefore give you the highest utility. Sorry about my english
Luka
Okay... I understand now
Abena
Great!
Luka
hello room
Lawal
one of the leading industrial nations of the world ranking second in manufacturing output after the USA is a. Russia b. Germany c. Britain d. Japan
Lawal
china
Siddharth
japan
Siddharth
good morning
Lamin
hi
Rafiu
hi
nivedha
japan
Ylaine
morning
Adegboye
no other questions?
Ylaine
hii
Dipun
I am from India
Dipun
same question are not mentioned
Dipun
first you give my answer
Dipun
hi
adelakun
welcome
Ahmed
dipun naik
Ahmed
whats your question
adelakun
whats your question
adelakun
I am from India
Dipun
retype the questions
adelakun
marginal untility is the last point desire of a consumer that gets benefit from related good/ service.
Saboor
Why are some countries rich and why are some countries poor? . is poorness a human cause?
Yacquub
well several factors are included...it's not just because of human..
Ylaine
what is a correct reason
Vijay
Japan
Lawal
countries which are rich they are developed countries they have good resources minerals technology power knowledge to use the resources poor countries are under developing countries they have lack of resources, knowledge and if they have these so they dont know the use of these resources.
Siddharth
so these knowledgeable people move /migrate to the other rich/developed countries
Siddharth
Poverty of a country is also related to cultural, economical, and military domination. Usually, the dominant country imposes all of these powers when diplomatically needed or sometimes by force.
Ernest
You can also have considerable poverty in a rich country when such poverty is measured within sectors of its population. In other words, economic indicators can sometime mask such poverty.
Ernest
For example, the U.S.A. has a very high measure of GDP per capital, but millions of Americans ( a considerable amount are children) live in poverty.
Ernest
So poverty is not an easy social phenomenon to pin down neatly into one social realm or another.
Ernest
pls what is price ceiling
jasmine
its the max price a seller can charge for a product, mostly imposed by the government to protect the consumer
Luka
its the max price a seller can charge for a product, mostly imposed by the government to protect the consumer plus it must be imposed below the equilibrium price in order to be effective. A shortage will also be created after its imposition.
Zafar
can happiness be measured?
Ylaine
Happiness is too subjective to be measured as an economic phenomenon or reality. I think that happiness happens at several levels of the human condition: biological, psychological, intellectual and at the level of the soul. How can economic theory be scientific about it?
Ernest
about I have read of something called gross happiness index.
Ylaine
Germany
Arthur
what's Neo classical definition of economic
Mohammed
hi
ALLAJI
economic is a social science studied as a relationship between end and needs scarce which have alternative uses
ALLAJI
what's equilibrium
Daniel
What is economies of scale
Jeremiah Reply
In microeconomics, economies of scale are the sum of total costs saved or that a firm has advantage over its competitors due to its scale of operations. More specifically, it is the firm's cost savings per unit of output that it gains as its production increases in scale.
Ernest
one of the leading industrial nations of the world ranking second in manufacturing output after the USA is ......... a. Russia b. Germany c. Britain d. Japan
Lawal
what is supply of demand?
Joseph Reply
supply of demand?
Yuusuf
1)importance of internal trade. 2) international trade barriers 3) principles of international trade
umar Reply
how can tell me about the GDP
Mahmood
explain the basic economic concept using ppc ?
Nurul Reply
scarcity can be represented by imagining a country producing only 2 goods and the resources to do so are fixed, hence a choice must be made and how to divide the limited resources between the two goods. you can choose any combination of the two goods that fall directly on the curve which represents
Justin
maximum efficiency and the highest possible output at this point in time. if you choose to not utilize all the resources then you will be inefficient (not to your best ability) and produce below the curve. however if you have increases in technology or find new resources you can shift the curve out
Justin
Please what is meant by resources allocation
albert Reply
Please I need explanation about resources allocation
albert
what is cost
Mohit Reply
Cost:-is the sacrifice or measured price paid to acquire, produce or maintain a good or service
Yuusuf
exactly
Emmanuel
thanks
Yuusuf
To what extend is labour, capital, land and entrepreneur considered as free good
Prince
#what is public finance
Ryan Reply
public finance is the study of how the government generates and spends to facilitate the day to day operations. simply put its an analysis of the income/expenditure statement of the government and how it affects welfare
Justin
#kk fenks
Ryan
you say it all
Emmanuel
what is economic model
chantal Reply
it may differ as different economist model ,but as to me it is a formal presentation of economic theory.
miidhagaa
what are the factors affecting utility
Silas

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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